When credit card payments are introduced, a fee is charged, but is sales tax applied to card fees deducted from the original sales? These costs are mistake-prone, as they are handled differently depending on whether you sign a contract directly with the card-issuing institution.

This article explains how credit card payments work and the relationship between card fees and VAT.

What’s in this article?

• How credit card payments work
  
• Contracting directly with a credit card company
  
• Contracting with a payment processor
  
• Are e-payment fees taxable?
  
• Payment fees for card users
  
• Supporting cashless payments
  

How credit card payments work

The diagram below provides a broad overview of credit card payments. Reviewing it helps understand the relationship between card fees and consumption tax.

Acquirers, issuers, international brands, and payment intermediaries play important roles in the credit card industry, interacting with merchants and card users.

What are commonly referred to as credit card companies are divided into “acquirers,” which act as a bridge among vendors and international brands, and “issuers,” which act as an intermediary between merchants and card users. In this article, they will be referred to as credit card companies.

Contracting directly with a credit card company

As mentioned at the beginning of this section, depending on if fees for credit card payments become subject to taxation comes down to whether or not the merchant contracts directly with the credit card company.

Fees paid by merchants directly to credit card companies are tax-exempt

This occurs when a merchant contracts directly with a credit card company, as it is deemed a transaction in which the merchant “assigns” the credit card sales proceeds to the institution.

Such an assignment of money claims is considered a tax-free transaction, and the card processing fee can be interpreted as having the nature of interest on the assigned money claims. As a result, the processing charge is also exempt.

When the merchant sells goods worth ¥10,000 to a card user, it remits the sales proceeds of ¥10,000 to the credit card company. The actual remitted amount received later from them is ¥9,500, and the merchant bears ¥500 as a commission. Therefore, this fee is interpreted as a transferred money claim and is exempt from tax.

The diagram below shows an example of a merchant signing a contract directly with a credit card company.

Contracting with a payment processor

In practice, signing individual contracts with multiple credit card companies is uncommon, as it is time-consuming and labour-intensive. The majority of merchants accept credit card transactions through a payment processor.

Fees paid by merchants through settlement agents are subject to taxation

Using a processing agency can reduce operational burden by acting as an intermediary between the merchant and multiple credit card companies, handling all contracts on their behalf.

In this case, revenue and fees from card-based sales are transactions handled by the processing company and are not remitted directly to the issuer. Hence, these fees are classified as a type of system charge and are considered taxable.

The exception is when a payment processor enters a receivables transfer agreement directly with a merchant. In this case, the tax is exempt, as in the case of a direct contract with a credit card company.

Are e-money payment fees taxable?

E-money, or electronic money, is a cashless payment method similar to credit card payments. Stores charge a transaction fee for e-money.

Transportation e-money includes Suica and PASMO, credit card e-money includes QUICPay and iD, and circulation e-money includes WAON and nanaco. Many stores now accept a wide range of these payments.

Is there a consumption tax on these e-money transaction fees? For e-money transactions, even if consumption tax is applied to the transaction fee depends on if it is a pre- or post-payment method.

In the case of the prepayment type

The commission is taxable for types of e-money that require pre-payment before purchasing goods. This is because electronic money has the same characteristics as cash and is not considered a transfer of credit.

Suica, PASMO, WAON, nanaco, etc., fall under the pre-payment type of electronic money.

In the case of deferred payment type

For deferred-payment e-money, customers pay the settlement company after purchasing the goods.

Just as a store extends financing through a credit card company, this can be considered a loan transfer to the e-money settlement service. Accordingly, the associated fees for these deferred-payment arrangements are tax-exempt transactions.

QUICPay and iD fall under the category of postpaid e-money.

Payment fees for card users

Since we believe that businesses also use credit cards to make payments, we will briefly explain the fees from a cardholder’s perspective at the end of this section.

When you use a credit card to purchase at a store in Japan, if you choose to pay in a lump sum, you will not be charged a payment fee at all. The costs incurred in instalments are an interest discount charge item under the consumption tax law and are in turn exempt from that category.

However, if you use a credit card to pay taxes, a specific surcharge will be billed regardless of whether you pay in a lump sum.

Supporting cashless payments

This article has explained the structure of card-based transactions and fees.

As card-based and other cashless settlement methods have appeared more frequently, their underlying systems have become increasingly difficult. But, payment services have evolved, making managing complex taxes and fees easier.

Stripe Tax, for example, can automate intricate tax-related tasks, allowing you to calculate and report tax amounts for all payments. For businesses looking to enhance their operations and focus on growth, incorporating such a solution is key.